Large MOB Portfolio Sales Often Fly Under the Radar

ARNOLD, Md. – In the medical office building (MOB) space, large portfolio sales involving publicly traded companies usually grab most of the headlines. Recent blockbuster deals include Physicians Realty Trust’s (NYSE: DOC) $700 million acquisition of more than 50 MOBs from Catholic Health Initiatives in 2016 and Healthcare Trust of America’s (NYSE: HTA) $2.25 billion purchase of more than 70 medical office properties from Duke Realty Corp. (NYSE: DRE) in recent months.

But it’s interesting to note that some MOB portfolio sales that would be large enough to rank among the biggest of the year often fly under the radar. We’re talking about medical facilities that trade hands as part of “entity-level” transactions. In other words, when mergers and acquisitions (M&As) occur among health systems and/or healthcare insurance providers, large healthcare real estate (HRE) portfolios are usually part of the transactions, but the value of the real estate is rarely disclosed. Thus, copious amounts of HRE can change hands almost unnoticed.

An example took place early in 2017, after a lengthy regulatory approval process, when Oakland, Calif.-based Kaiser Permanente paid $1.8 billion to acquire Seattle-based Group Health Cooperative, a 70-year-old integrated health system and insurance plan with about 650,000 members in the state of Washington and northern Idaho.

Mike Hargrave, principal with Arnold, Md.-based Revista, which researches and distributes data concerning the HRE market to its subscribers, tells HREI the deal included over 20 MOBs comprising more than 1.3 million square feet. The real estate portion of the transaction was valued at over $600 million according to a bond filing by Kaiser.

“This is the kind of deal – the trading of real estate that’s part of a larger merger – that contributes to the strong volume for MOB sales but that often does not grab headlines and that often does not get discussed as much as, for example, the HTA-Duke Realty deal,” Mr. Hargrave says.

Among the 20+ MOBs included in the Kaiser-Group Health deal, Mr. Hargrave notes, were two “very prominent” medical properties. One was the six-story Kaiser Capitol Hill Campus MOB in Seattle, which has 268,398 square feet of space and sits adjacent to the famed “First Hill” medical corridor. The other was the four-story Kaiser Bellevue Medical Center, which has 174,799 square feet in Bellevue, Wash., outside of Seattle.

Mr. Hargrave says Revista is beginning to include real estate information on mergers and acquisitions, such as the one involving Kaiser and Group Health.

“When we can cull out that data – and we have methods for doing so even when two not-for-profit entities are involved – we feel it’s important to do so,” he says. “The real estate involved in Kaiser’s acquisition of Group Health was certainly an important piece of the overall deal, as Kaiser now has more locations and places to fly its flag in that market, including Seattle, and more places for its members to receive care.” He adds that the price paid for Group Health’s real estate accounted for about a third of the overall transaction price.

Data regarding entity-level real estate transactions is important for many people involved in HRE, he adds, as “it is certainly very important to them to know all of the deals taking place throughout the country, whether they involve an arm’s length transaction or the merging of health systems. The professionals in the sector need as much information as they can possibly gather, including knowing who owns such facilities.”